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Britton Mickelson
Professor Dennis Wilson
ECON 2020 401
4/25/2015
Subprime Mortgage Crisis
The subprime mortgage crisis refers to period in our recent history. More specifically it
refers to the current US recession that occurred between late 2007 through 2009. Overall it was
prompted by massive declines in home values, which in turn lead to borrowers defaulting on
their mortgages and the depreciation of housing securities. This in turn led to large declines in
consumer spending, which caused investor spending to decay.
As a valuation analyst for SPS holdings I see a good amount of defaulted mortgages past
over my desk. Most of the time I see some properties that should have never been loaned on and
others where the borrower was condemned from the beginning to loss their home. So why did
bank lend on terrible piece of collateral with problematic borrowers, furthermore why didnt
government police some policy and procedures to prevent the Subprime Mortgage Crisis? I have
both negative and positive opinions on this matter.
First lets focus on the constructive positive answer. Regardless of what every thinks
about the federal government, I do believe that they do want to help grow the middle class. That
means taking risks. Take the Homestead Acts, in the mid to late 1800s the federal government
past a series of governmental procedures to allow the everyday working man to claim a piece of
land for himself (Goverment). The original homestead act laid out the following conditions: that
any adult citizen, or intended citizen, who had never borne arms against the U.S. government
could claim 160 acres of surveyed government land. Claimants were required to improve the

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plot by building a dwelling and cultivating the land. After 5 years on the land, the original filer
was entitled to the property, free and clear, except for a small registration fee. Title could also be
acquired after only a 6-month residency and trivial improvements, provided the claimant paid the
government $1.25 per acre. After the Civil War, Union soldiers could deduct the time they had
served from the residency requirements the Home stead wasnt perfect (Goverment). The Home
Stead act was flawed. For example 160 Acre limit was in some areas not big enough to sustain a
viable farm, Other individuals use the homestead act to claim land without really occupying the
premises, instead they would claimed the land with no intention of living on it, but rather
intended to flip it for a profit (Goverment). Overall the Homestead Act did inspire settlers,
citizens and immigrants to venture westward and fulfill living the American dream. But not
everyone succeeded.
There is really no good solid answers for why the subprime mortgage crisis happened,
but, overall it was a number of negative factors:
1. Rise in subprime lending: The long and short of who a subprime borrower is, is an
individual who has fair to poor credit or is considered a higher risk investment. A subprime lender is someone who willing to lend knowing that borrower is at a higher risk to
default on their loan, therefore the investor will charge higher fees and a higher interest
rate in order to proceed with the transaction. The subprime borrowers the lender takes on
the higher the risk.
2. Adjustable rate mortgages: a mortgage whose rate of interest is adjusted periodically to
reflect market conditions. These loan are sensitive to markets positive and negative
reactions (Hartman).
3. Poor banking procedures and policies: Big business needs to strong regulatory
supervision and controls to prevent massive failures (Weisberg)

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4. Governmental influence: Government doesnt create jobs, nor do they need to intervene
when something goes wrong (Bailout Recipients-Bailout Tracker).
Some argue that the bailout was needed, others argued that the private sector in time could of
benefit from competitors going out of business. Overall the cold hard facts are this; TARP
(Troubled Asset Relief Program) and other programs like it were put into effect; the cost to repay
these programs were positioned on future tax payers or we the now students taking this course.
But is this really a negative thing to put it simple, YES. We cannot expect the same treatment
to come around when another financial crisis comes around when were the middle age, middle
class. There are number of grandfather programs right now that cannot sustain the longevity that
was promised when they were implemented. Programs like Medicaid (in all its forms), Medicare,
Disability and Social Security. Then you add the new programs like the Affordable health care
act (A.K.A.;Obama Care). The long and short is do not except the government to bail us out
when we turn 50.
In order to restore confidence in my opinion a few things need to happen. Allow the market
to dictate what works. If lenders what to lend to subprime individuals then they can with all the
potential inherit consequences. Meaning that they could fail and success on their own. Its up to
financial institution as to what level risk they are willing to invest on.
Adjustable rate mortgages need to go to the scrap pile. There is really not an upside to ARM
loan. They are risky and have little benefit when they function properly.
If we except banks to take ownership of their investment, then consumers need to take charge
of their pocket books. If you can afford a house, then do not buy one. If you struggle with your
personal finances then sit down with planner who can aid you in successfully managing your
money. Please do not believe any get rich quick technique, they very rarely work.

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The government needs to back off and allow the market to work. Its never fun to experience
a down turn economy but the government needs to stop pulling out the check and start paying
offs its own debt (Roughly 16~ Trillion dollars).
If we want the economy to function freely, then we need to allow it to function freely. In
order for and economy to function we need consumers, businesses, government, banks, etc... To
all perform in their respective fields. The Subprime Mortgage Crisis happened because we allow
it to, we overspent and allowed the government to intervene and put the debt on the current
generation children. This is bad practice and poor policy. The only real solution is to allow
individuals, corporations, etc.. to learn the way we all do. By experience.

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Works Cited
Bailout Recipients-Bailout Tracker. https://projects.propublica.org/bailout/list. n.d. 25 04 2015.
Goverment, U.S. http://www.ourdocuments.gov/doc.php?flash=true&doc=31. 1862. 25 04 2015.
Hartman, Dennis. http://homeguides.sfgate.com/definition-variable-rate-mortgage-8870.html.
n.d. 25 04 2015.
Weisberg, Jacob.
http://www.slate.com/articles/news_and_politics/the_big_idea/2010/01/what_caused_the
_economic_crisis.html. n.d. 25 04 2014.